This chapter begins a series of chapters on the tax treatment of dealings in interests in corporations, and particularly shares. Shares may be created, transferred and terminated (holding being dealt with in earlier chapters). This chapter deals with the creation of shares and begins with a discussion of the issue of shares for cash versus the issue of shares for non-business assets. Whatever the form of consideration provided, the assets contributed to a corporation are duplicated or reflected in the value of the shares. Shares as assets deriving their value from corporate assets and activities is a theme of the remainder of the book. With respect to contributions of assets for shares, the primary issue is whether the transfer of assets to the corporation gives rise to the taxation of build in gains for the transferor. Often countries provide relief from this charge (rollover) and in doing so challenge the separate identity of the corporation for tax purposes. The focus of the chapter is on incorporation of a business and the different ways in which countries structure qualification for relief on incorporation.

Taxpayers that carry on trading businesses (eg manufacturers, wholesalers and retailers) buy and sell ‘trading stock’. As trading stock is a ‘revenue asset’, buying and selling trading stock is dealt with under the ordinary income (s 6-5 ITAA97) and general deduction (s 8-1 ITAA97) provisions. In other words, subject to the GST reconciliation rules, the proceeds from selling trading stock is assessable under s 6-5 and the cost of purchasing trading stock is deductible under s 8-1.

This chapter examines the meaning of ‘trading stock’ and the general treatment of trading stock under ss 6-5 and 8-1. It also discusses the operation of the special provisions in div 70 ITAA97 that deal with accounting and valuing trading stock.